The Bitter Fruit of Insolvency

The downgrade of the credit standing of the United States by Standard and Poor's was long overdue. The salient factor in the drop was not the current level of indebtedness but the devastation that can be seen by looking across the landscape of the next ten to twenty years -- and the indifference to that prospect by the current governing class and much of the electorate.This past weekend I was in the company of some very liberal relatives who were incensed that S&P dared downgrade the credit standing of the United States. In their myopic worldview, this was simply another part of a vast right-wing conspiracy out to denigrate and defeat Barack Obama. They refused to accept the reality of the disaster facing the country if a dramatic change of direction is not immediately forthcoming.

In an attempt to make a complex subject understandable I recently proposed a "National Insolvency Index" that measures the ability of a country to remain solvent, avoid national bankruptcy, and grow its economy. A snapshot of the present-day and future health of any nation can be ascertained by reviewing two factors: the annual government budget deficit as a percent of its Gross Domestic Product and the unemployment rate. The accelerated level of deficit spending (except in times of a major war such as World War II) is indicative of a lack of fiscal discipline and tax revenues sufficient to finance those expenditures. These revenues can only come from an economy in an overall growth cycle epitomized by high levels of employment. When large deficits are coupled with a dramatic increase in unemployment for more than three or four years in a row, that country has embarked on a dangerous road that will lead to insolvency if not addressed quickly.

By the accumulation these high budget deficits, the total national debt will dramatically increase, thereby exacerbating the nation's problems as borrowing needs (pulling money out of the private sector) and subsequent higher interest cost will by necessity escalate, putting a further drag on the economy and its ability to create jobs. Thus a potential vicious cycle is initiated (one in which the United States now finds itself).

If a nation wishes to maintain its solvency and continue to expand its economy, it should not experience deficits higher than 3% of its Gross Domestic Product and, in today's quasi-welfare societies, unemployment rates above 6 to 7%. On an aggregate basis, a combination of these percentages should always remain below 10. The higher this "National Insolvency Index" above 10, the greater the problems that country is experiencing, and if that index remains above 10 for three years or more the viable solutions to solve the dilemmas will be increasingly difficult to enact.

The United States has not only one of the worst National Insolvency Indices in the world since 2009 -- the year Barack Obama assumed office -- but the most dismal picture imaginable over the next ten plus years assuming nothing is changed.

The Obama Years:

2009

2010

2011

2012

Insolvency Index

19.1

18.5

20.2

18.0 Est.

The average for the eight years of George W. Bush: 7.4

Per the Government Accountability Office for the estimate of future annual budget deficits and the Congressional Budget Office for their estimates of future unemployment rates (it should be noted: the CBO notoriously underestimates), the next 10 years are as follows if no massive and dramatic changes are made:

2013

2014

2015

2016

2017

Index

14.7

14.3

14.0

13.5

13.8

2018

2019

2020

2021

2022

Index

14.0

15.0

15.5

15.8

16.3

At no point from 2009 to 2022 and beyond does this index fall below 10. A disaster of monumental proportions is in the offing, and the optimistic outlook by the Congressional Budget Office that the unemployment rate would be at 5.5% by 2016 will never happen making the index even worse than the above chart.

Over this period from the end of 2008 to 2022, the national debt held by the public as a percent of the Gross Domestic Product will grow from 42.0% to 125% and interest expenditures from 1.4% of GDP to 3.9% (in terms of 2011 dollars that is an increase from $200 Billion to nearly $600 Billion or 64% of the total individual income tax receipts by the IRS in 2010.)

This is why S&P has downgraded the creditworthiness of the United States and in reality should follow up with another more dramatic downgrade soon.

After World War II the United States became the greatest economic and military power the world has ever seen. This accomplishment happened in the period 1947 through 2008. The National Insolvency Index for the country averaged 6.9 over those 61 intervening years. It will average 16.0 from 2009 through 2022, far above the threshold of 10.

The urgency of reversing this index cannot be overstated; the United States is firmly on the path of becoming the most massive economic and financial failure in the history of mankind. The credit downgrade is a shot across the bow, not a political or ideological ploy. Will the current American ruling class and the average American citizen glued to the television begin to wake up and understand that he or she is living a tragic reality show in which everyone and everyone's progeny will bear the burden of a dramatically reduced standard of living and a country at the mercy of others?

The downgrade of the credit standing of the United States by Standard and Poor's was long overdue. The salient factor in the drop was not the current level of indebtedness but the devastation that can be seen by looking across the landscape of the next ten to twenty years -- and the indifference to that prospect by the current governing class and much of the electorate.

This past weekend I was in the company of some very liberal relatives who were incensed that S&P dared downgrade the credit standing of the United States. In their myopic worldview, this was simply another part of a vast right-wing conspiracy out to denigrate and defeat Barack Obama. They refused to accept the reality of the disaster facing the country if a dramatic change of direction is not immediately forthcoming.

In an attempt to make a complex subject understandable I recently proposed a "National Insolvency Index" that measures the ability of a country to remain solvent, avoid national bankruptcy, and grow its economy. A snapshot of the present-day and future health of any nation can be ascertained by reviewing two factors: the annual government budget deficit as a percent of its Gross Domestic Product and the unemployment rate. The accelerated level of deficit spending (except in times of a major war such as World War II) is indicative of a lack of fiscal discipline and tax revenues sufficient to finance those expenditures. These revenues can only come from an economy in an overall growth cycle epitomized by high levels of employment. When large deficits are coupled with a dramatic increase in unemployment for more than three or four years in a row, that country has embarked on a dangerous road that will lead to insolvency if not addressed quickly.

By the accumulation these high budget deficits, the total national debt will dramatically increase, thereby exacerbating the nation's problems as borrowing needs (pulling money out of the private sector) and subsequent higher interest cost will by necessity escalate, putting a further drag on the economy and its ability to create jobs. Thus a potential vicious cycle is initiated (one in which the United States now finds itself).

If a nation wishes to maintain its solvency and continue to expand its economy, it should not experience deficits higher than 3% of its Gross Domestic Product and, in today's quasi-welfare societies, unemployment rates above 6 to 7%. On an aggregate basis, a combination of these percentages should always remain below 10. The higher this "National Insolvency Index" above 10, the greater the problems that country is experiencing, and if that index remains above 10 for three years or more the viable solutions to solve the dilemmas will be increasingly difficult to enact.

The United States has not only one of the worst National Insolvency Indices in the world since 2009 -- the year Barack Obama assumed office -- but the most dismal picture imaginable over the next ten plus years assuming nothing is changed.

The Obama Years:

2009

2010

2011

2012

Insolvency Index

19.1

18.5

20.2

18.0 Est.

The average for the eight years of George W. Bush: 7.4

Per the Government Accountability Office for the estimate of future annual budget deficits and the Congressional Budget Office for their estimates of future unemployment rates (it should be noted: the CBO notoriously underestimates), the next 10 years are as follows if no massive and dramatic changes are made:

2013

2014

2015

2016

2017

Index

14.7

14.3

14.0

13.5

13.8

2018

2019

2020

2021

2022

Index

14.0

15.0

15.5

15.8

16.3

At no point from 2009 to 2022 and beyond does this index fall below 10. A disaster of monumental proportions is in the offing, and the optimistic outlook by the Congressional Budget Office that the unemployment rate would be at 5.5% by 2016 will never happen making the index even worse than the above chart.

Over this period from the end of 2008 to 2022, the national debt held by the public as a percent of the Gross Domestic Product will grow from 42.0% to 125% and interest expenditures from 1.4% of GDP to 3.9% (in terms of 2011 dollars that is an increase from $200 Billion to nearly $600 Billion or 64% of the total individual income tax receipts by the IRS in 2010.)

This is why S&P has downgraded the creditworthiness of the United States and in reality should follow up with another more dramatic downgrade soon.

After World War II the United States became the greatest economic and military power the world has ever seen. This accomplishment happened in the period 1947 through 2008. The National Insolvency Index for the country averaged 6.9 over those 61 intervening years. It will average 16.0 from 2009 through 2022, far above the threshold of 10.

The urgency of reversing this index cannot be overstated; the United States is firmly on the path of becoming the most massive economic and financial failure in the history of mankind. The credit downgrade is a shot across the bow, not a political or ideological ploy. Will the current American ruling class and the average American citizen glued to the television begin to wake up and understand that he or she is living a tragic reality show in which everyone and everyone's progeny will bear the burden of a dramatically reduced standard of living and a country at the mercy of others?